China's Pursuit of Semiconductor Independence

good afternoon thanks for coming to CSIS for discussion today of Chinese semiconductor industry its plans its intentions its fate I have I told the speakers before we came out that they were kind of my dream team for talking about this topic my name is Jim Lewis I work here but with me we have Rob Atkinson who's the president of the information technology and innovation foundation one of the better think tanks on this stuff you're in town I'm not going to read their full BIOS they'll be online and in any case they're way too long Jimmy Goodrich the vice president global policy semiconductor industry association Jimmy is kind of the person everyone sends reporters to when you want to talk about semiconductors so he's glad to have him here and um what the heck well here we go how can I read the thing how can I read your bio Aaron Anna's who's the senior vice president the US China Business Council and is one of Washington's real experts on business in China so great lineup what we're gonna do here today is I've asked them all to speak for 5 or 10 minutes or so on any topic they want Rob was going to talk about his cuisine adventures last time it was in China will talk for 5 or 10 minutes up here then we'll go to off a few questions they don't have questions we'll let people in the audience ask questions so that's the plan Jimmy why don't we start with you and just go right down the aisle here and that'll make you the last okay so Jimmy go ahead sure thanks Jim and really glad to be here and I really commend you for putting together a tremendous report I think you just released that today so if folks haven't had time to read through it encourage you to do so I think it's a good contribution good overview of what's happening in China in this space so I'm just gonna give a couple of thoughts before we kick off the discussion we're here more to talk with each other and a group and answer questions but starting at a higher level before we get to China and I'll try and dive into that a little bit I think it's important to remember when we're talking about semiconductors and I'm working for the indc group si a the semiconductor industry association we're actually in a very unique spot as an industry and that the United States still dominates the semiconductor industry today and so whether its market share technology US companies have about half of the worldwide market in terms of technology a lot of the leading processes architecture design 5-7 nanometer chips are being designed or manufactured here in the United States and those are incredible innovations that are be done by US companies and you know because of that it's actually a little known fact that the u.s. still produces chips here it's actually our fourth largest export we have manufacturing about nineteen states and a very sustainable business model on average US companies and and this is true for many global companies as well invest about 20% of the revenue into R&D and that's about neck-and-neck with pharmaceuticals for highest level of technology intensity by it by industry so we're pretty well positioned today at least from a u.s. perspective to capture a lot of the new innovations in market share that's going to be coming with 5g or AI or other technologies down the road another sort of high level you know fact I think we need to consider when looking at the China angle is that the industry is incredibly global so for any company or country literally nobody can do it on their own whether it's from chip design takes developers all around the world on a 24-hour cycle whether it's manufacturing where a wafer might go from one country the next four or five times around the world literally before it gets shipped to customers looking at inputs in the fab a lot of materials it's incredibly global if not the most global industry out there and so for countries like China or others they're looking to do everything within their borders that really defies the logic of this industry and how we become successful and then turning the China before we get to what China is doing just thinking about where China sits today in the global industry whether you're an American Japanese Korean or Taiwanese firm China is central if not absolutely critical to to both the market in the supply chain so for the average company 30 to 35% of their sales are coming from companies in China that includes some multinationals but by and large also Chinese companies and most of the world's electronics supply chain is either have been built up or migrated to China quite a long time ago and those are the you know the companies that are assembling the electronics and so most of our chips end up going to China passing through China and half of the China market today in terms of sales are actually from multinationals so your Apple supply chain China your Delhi etc but the interesting fact is that for domestic Chinese OEMs these are the companies like Xiaomi that are doing mobile phones or DJI on the drone front their compound annual growth is sometimes four or five X those of their multinational competitors so a lot of the growth prospects are there as well and so looking at then what actually China is doing to build up their industry it's important also to remember that you know were today the industry is is strong globally and China today is in a very weak position in your report I think goes through that in a lot of detail and I won't spend too much time on it but just a couple of things to remember is that today China's accounts are about 10% of worldwide ship sales that's a very small number and that's why they're throwing a lot of money to try and increase the number of ships they can make domestically and the Chinese leadership is also very blunt and talking about the fact that they want to reduce reliance on on foreign countries and companies so in 2014 the Chinese government put together a national strategy they coupled that with about a hundred billion dollars in state financing vehicles whether it's provincial national local and it at first the the Beijing government in it thought well you know why not buy as many companies as we can better better to buy then try and build on our own it's a lot easier and I think we know the story there governments worldwide erected a lot of barriers and made that almost impossible today for for for Chinese companies to to do cross-border M&A in the in this industry so about two years ago the government had a reset and said well if we can't buy it let's build it and so now we see around 100 billion roughly over five six years invested into domestic fabs and that's some energy factories that are being built up about 30 to 40 of them the vast majority I think are gonna be mothballed or or a dramatic failure but some and some in there could be particularly if say in memory chips and also foundry manufacturing could could disrupt some parts of the industry particularly similar patterns we've seen where Chinese industrial policy has directed itself at an industry ramped up domestic production through state subsidies and had in some cases over non-market over capacity and semiconductors are different than those those sectors because we're highly diversified one chip is not the same and so it's very hard to have an overcapacity glut industry writ large so again very different from that aspect but I think stepping back from our perspective you know US companies are not afraid of of competition you know where we compete with each other every day worldwide in the United States and you know amongst a lot of the Chinese companies many of them are actually quite market-based and doing well on their own without government support it's that more smaller faction that's got some big state subsidies and in particular where you know we think there needs to be a lot of improvements around the intellectual property protection and IP and ensuring that trying to build its industry on the backs of its own IP not that of others and then just you know I think we can talk about this a little bit more in the discussion but I would like to turn a little bit when we can about you know what the response is and you know I think ultimately you know we're not going to be able to stop China from building its own industry they're going they are building their industry they are going to increase their share of the market and so we have to think hard about what are we going to do to maintain the lead because we're not like steel aluminum other sectors where they're trying to survive against Chinese dominant competition here we have the lead we need to extend it enhance it and that's really through doubling down on federal government research ensuring that we have the workforce so that the next to 3 nanometer development the next AI chip that's coming out of here in the US and that's funded through us research and that's how we can really at the at the end of the day extend our lead when it comes to China so looking for the discussion with the rest of the group and and have a lot more to share but I'll stop there great Thank You Jimmy you've raised a number of the key issues that we will come back to in the discussion for those who are standing there are chairs in the front there's no extra charged for the front of the airplane Rob please okay well first of all thank you Jim it's really a pleasure to be here thanks for having me and I really commend that you all read this report I found it both a very good framing of the issue and a lot of really good insights into what's happening with Chinese semiconductors I think one way to think about this issue is this is the single most important technology in the world everything else that we think about in going forward into this next technology wave with people talk about 5g AI robotics autonomous systems every one of those depends upon chip technology and if chip technology stagnates and doesn't continue to innovate and progress at the past rates it's been doing we're gonna see that not just in the semiconductor and this we're gonna see that in all the downstream industries and I just bought a new washing machine yesterday as my old one didn't my daughters down there and it doesn't work so I go to Best Buy I get what I don't know how many chips that's got in it but it does all these amazing stuff that couldn't do ten years ago why is that an issue it's an issue because it is incredibly hard to make progress in this industry now compared to say 40 or 50 years ago there's a good study by Nick bloom at Stanford and John van Rijn and where they looked at how hard how easy it was or how hard it's been and how to do innovation in certain industries and what they estimated was in 1970 assuming it took the same thing one engineer to get a Moore's Law progress a Moore's law doubling in 18 to 24 months processing speed and half in price together that's one doubling it took the state one engineer today it takes 70 engineers so this is super hard super hard and the hardness relates to how much money that companies you need you have to put an enormous amount of money into design into Rd and figure out how to do that and then to build the fab I don't know what you mean billions and six whatever it is all ten to fifteen ten to fifteen billion so why does that matter why that matters is because the threat from China and I would argue by the way this is virtually an artificial threat in the sense that they would not be developing a semiconductor industry without government industrial policy there's sort of no natural way that they would do that that threat one of the biggest threats and this is a point Jim you really made very well in the paper that is going to have a negative effect if they're somewhat successful on a negative effect on global innovation and we could see it first in the DRAM market where let's just this three major DRAM producers micron being one and two in Korea let's just say they're able to get in that market and and they get enough out there even if they just even if they just serve the Chinese market and reduce sales in the U for the u.s. for micron or Samsung or SK Hynix that's gonna mean lower margins for those three companies that's going to mean they're gonna not put as much money into R&D and doing the next generation I read a fantastic book this summer on on my summer vacation it was a biography of Gordon Moore encourage everybody to read it's just fascinating book and one of the things you read that book work more than felt one of the founders of Intel whether you read that book is how often they bet the company they were like well this one worked but if we don't put all the money we made from this generation into this next generation we're gonna be in deep trouble and luckily they kept being able to do that but that's the dynamic in this industry it's not like the steel industry or the car industry where you're not not as much as it riding on top of that so I'm a little more I get i personal totally get that semiconductors is probably one of the hardest technologies for the Chinese to math it's a combination if you have to understand the recipe and you've got to be a really skilled cook with the right tools all three hard to do you know compared to some other areas even even biotech I mean the Chinese are pretty far ahead on technologies like CRISPR so I get that this is hard but I think we're making a mistake if we assume they can never do it that this is just too hard for them to do because the Chinese have gone after hard technology problems in the past you know for example aviation now they're they're making up essentially the equivalent of 737 a high-speed rail that are the world leader in that certainly our telecom equipment with Wow a supercomputers they was always just are we ahead this week are they ahead quantum they're getting into that so I don't think we should just sort of automatically rule out that this one's so hard they can't ever do this one is hard it's gonna be harder for them it'll take them longer but if we sort of just you know fall asleep and this is one point Jim I guess I had a slightly different take where your point about them it's hard because they don't have the talent but from some of the folks I've been talking to they're able to buy that talent from Korea and Taiwan in particular that somebody told me a story where there are flights coming in from Taipei and soul every Monday morning with a whole bunch of Engineers get laid off from Samsung maybe or whatever and they come to these factories or these R&D facilities and then Friday night they get on the plane that chauffeur drives them all of the plane they go home there was one of these places the guy told me again I I've no reason to doubt why he told him that he told me this but he said he was visiting one of these places and there was actually they had built a church on the campus of the factory or the facility because several of the engineers from career Taiwan were Christians so they put it so far to build a church because they wanted these people so badly so I think you can get talent it's harder but and then the same way with training people here and bringing them back and then their thousand talents program so I think it's hard but I don't think we should just be blase about the challenge smick if you're wondering with a company that has the church but no thanks for um Aaron please so I'm the generalist on this pan and Jim thankfully gave me some parameters that I could do almost anything with so my task relates to a little bit just generally about how China develops industrial policies what it means and what the context is of it and I think it's important to keep in mind why companies view China as important it's not just because you can produce a lot of stuff there and with so many conductors or any other nature and ship it out it's a massive market in and of itself and companies like to be close to where their customers are so that that dynamic will not change regardless of kind of what one industry is doing or not and companies that are participating in the market have an incentive to want to figure out how to tap into whatever the government is in that area is trying to promote particularly if they have innovative products that are going to be able to deliver in that market so with that as a context let me tell you a little bit about how China comes up with the plans of how it focuses on individual industries I think probably at its most basic the way to consider this is China likes to plan they've got five-year plans that set out broad national goals those five-year plans are then taken by every ministry in China and every provincial government and they come up with their own five-year plan to implement every aspect of it there are other policies that come out that are more specified made in China 2025 as one that we talk about a lot currently but previous programs have been everything from China's indigenous innovation policies which started around the early 2000s - it's less talked about cousin these days the strategic emerging industries for each of these the important thing to keep in mind particularly for Americans since we don't spend a whole lot of time doing strategic planning is that just because China has a plan doesn't mean that it's going to have a hundred percent success rate and implementing it but if you are a practitioner of strategic planning you know that what you do throughout that process is constantly evolve what your targets are what's achievable which industries are the ones that you think are doing better that you can redirect your policies to and we've seen those evolutions over the years that has led to things like made in China 2025 as I mentioned kind of that progression indigenous innovation was a policy that actually started as a pilot program in many provinces in China to try to develop domestic companies that had IP made in China as the basis for whatever the future products were going to be it caused a lot of fervor because it had some policies in it that were contrary both to China's WTO commitments and frankly contrary to how innovation happens around the world you can't force a company to localize innovation crosses those borders for a reason but that then honed itself into programs such as strategic emerging industries this was a program that China announced around 2011 it had nine sectors that China was going to be a leader in included everything from new energy vehicles to biotechnology all areas that China continues to evolve in but really the market itself is driving those issues really not so much Chinese companies at this point the most recent iteration and made in China 2025 has ten sectors that are in it many of them overlap with what was in strategic emerging industries they certainly have goals on things like indigenous innovation so the evolution and the constant movement of these policies towards getting more specific but also focusing on the areas where they become more important where where China has found that it is able to innovate and to be a leader in really is where the focus is I think that drive that desire to innovate to be a global leader to not be overly dependent upon foreign countries whether it's the United States or anyone else that really helps to inform how some of these decisions are made now you can set up a strategic plan that does all kinds of things but really as Jimmy and Robin pointed out how you fund it really depends a great deal on how successful you might be areas and I think in this one the other aspect to keep in mind about how China system is done is you might have a policy come out that is a Chinese policy but not necessarily all agencies within the Chinese government agree with it certainly a program like made in China 2025 which is very much a an industrial policy type we hear a lot more support of those kinds of programs coming from the Ministry of Industry and Information Technology and the National Development Reform Commission so that the state planners then you hear from the Ministry of Finance or from the Ministry of Commerce where they view competition as something that can help promote those issues but not only is there not always a consensus on how these policies come out there's also not always one way that these things are funded what we saw with strategic emerging industries is despite the fact that there were national government policies that stated that the government was going to put massive amounts of money into developing these sectors those the actual funds were expected to come from provincial governments we've seen initiatives from China to promote small and medium sized enterprises that have been directives to Chinese banks to loan to those industries so this combination of both general subsidies from the government a desire to potentially have the market help in terms of bank financing these issues and where those things intersect you can sometimes see all of these elements coming together now in the case of an industry like semiconductors where it has a lot of these boxes that get checked it's an area where China wants to innovate it's an area where China wants to be a viewed as a global leader and it has significant concerns about being overly dependent on others you see a lot more central government financing being committed to it but I guess I would say more generally when you're looking at these industries not every industry that China targets is going to be semiconductors but you can see the patterns and how it evolves and that's among the reasons why between the United States and other governments that deal with these issues we also need to be nimble in thinking about how they're prioritizing because not everything generally going to be competitive we need to focus more on the ones where the where the challenges really will exist Thank You Aaron that was a great lead-in to the discussion I'm going to ask a few questions and we'll turn to you my first question is is Chinese government a help or hindrance when it comes to building these industries in some ways when I see the growing involvement of the party in planning and in a very granular level in businesses I'm actually grateful because it probably slows the Chinese down but I don't I don't know what you think about that but when you think about the Chinese government programs here help or hindrance so when we start with you Jimmy well I think also picking up on where Aaron left off in terms of the financing you know what what the industrial policy that China has structure in the semiconductor space is you know I think if you look at bio or aviation it's certainly different and unique and and first the scale is extremely large compared to other sectors we're talking about again over a hundred billion dollars in capital that's being invested a lot of that's gonna be wasted but the scale is certainly large so even if you have a twenty five percent success rate you're still looking at a dent in certain parts of the industry and that's really unique in that several years ago the Chinese state set up something called the national integrated circuits investment fund and this is unique from their perspective where as opposed to taking the government finance reserves straight from the Treasury direct into the companies they set up a private equity investment model where they'd bring in professionals from the outside many of them tend to be from government banks to monitor the performance of these companies so that at the minimum even though it's government financing they're trying to make sure what's being spent is being used wisely and so you can see here that Chinese state trying to improve the efficiency of their plan really building on the lessons they've learned in other sectors where they were not as successful like in LEDs or Soler's where you had just you know very simple subsidies going out with zero accountability and so you can see here in semiconductors a a change here with their with their state plan the interesting thing though as several years ago I was in chyna right when the plane was being rolled out and talking to a group of the domestic semiconductor CEOs in China and you know one of them came up to me and said I don't want a cent of this money because as soon as you bring in the government as an investor as a shareholder they've got all sorts of crazy ideas of what we should do when we know better than they do about what's the market wants what the technology is where they need to compete now four years later it's re three years later he actually did take investment from the national icy fund and I asked him why he should do it he said well everyone else did so I had to be on level playing field with my competitors the interesting thing though is if you look at the single most successful chip company in China and and that's I think without doubt high silicon the design arm of hallway they don't have any of that support from the state I mean they've got the average tax breaks that any other company has but they haven't taken subsidies from the central government they haven't gotten big loans and they've really done a lot of it on their own and so it really like Alibaba being developed on its own without state support certainly they had the firewall to help but you know often times some of the most innovative companies coming out of the sort of bamboo shoes without that government support and so you know I think for China really if they wanted to be successful they have to really let the market decide who's gonna be the winner and loser and and that if they follow that path it'll also be easier and and less disruptive on the global industry so I agree with Jimmy on that I I think that Chinese government officials are not stupid people and they're they're they're they're like voracious learners and they they study every country in the world to understand how their innovation policies and systems work and then they try to incorporate that now they're not always nimble it takes him a while but they usually get there and I remember having a meeting with a high-level NDRC official that number years ago we were talking about this and he said we've been a number of tragedies in China and I thought earthquakes floods and what do you mean he goes well we put an enormous amount of money into building up the VCR industry right before the D these came on the market and so it was like they just wasted and you know whatever they spent it was just mind of them down the toilet but he said we've learned from that again they're not stupid they they they oh yeah that was bad and so you know partly through this I would call money laundering scheme they have through these private equity groups but you know interesting I was reading a study recently that showed or purported to show that if you add up all of the money that the government's state provincial and and federal national mostly it put into these private equity funds and then the commitments made all image or their I haven't yet but I think we should call the public equity because they're still state-owned some are private but most are state uh but yet whatever you want to call it equity funds do invest in companies equity the amount is forty percent of global VC and it is more than the gross domestic product of the country of the Netherlands so I don't care how unless you're ninety nine percent inefficient some of that's gonna stick to the wall and that's what I worry about I mean just add bond that you know I was in a city in southern China last year and they're building a five and a half billion dollar semiconductor fab and it's the local mayor's project basically every mayor wants to have a fab and I asked him why build a semiconductor fab he said well you know our industry is the worldwide center of Footwear sportswear for tennis shoe production and so we can't compete anymore we need a we define higher paying jobs so we're gonna build a semiconductor Factory and he said well it also what we've got this brilliant plan where we're gonna make sure that everyone who manufactures a tennis shoe in our city is gonna put one of their chips in it cuz there's gonna be a wearable electronics and so you've got these kind of creative ideas coming out of mayor's to build these cities but it's Emma doctor fabs but what do they really know about the market sometimes almost nothing yeah I guess I would that's actually a great point I think we you need to keep in mind that the simply throwing money at an issue doesn't necessarily guarantee success much like making a plan doesn't it doesn't make it a I think where some of the the distortions come from China in addition to putting a large amounts of money in is when you have sectors where China sets targets for what it's both domestic market share or global market shares now we can have a discussion about whether that in itself is counter to what global policies should be but at a minimum when you have that combination of significant amounts of largely subsidized money and industries that could use that money to do things you have a combination that can very easily lead to over capacity it's how you get to things like overcapacity and steel in many ways we look at the made in China 2025 program and all of those sectors that if all of that money genuinely ends up in them and China seeks to make sure that it's dominating the market simply having international companies come in and begin producing in China versus where their global supply chain might have other net otherwise naturally taken them you are doing you might be able to capture the market share but you're doing so by so increasing the size of the market that now there's not as many customers for it so in general I would say you know from from from my perspective the government isn't completely a hindrance but it certainly doesn't give you any great sense of success that's going to come out of how they how they focus quickly sure so I think the thing that we tend to look at China from our own sort of perspective which is kind of neoclassical economics and you want to have allocation efficiency and you don't really want waste that's not the way to look at this okay they're willing to blow an enormous amount of money there's a new study that just cares actually an economist article based I think on a World Bank study and it showed that if you know what total factor productivity is total factor productivity is basically all of the inputs to outputs so energy capital goods labor a total factor productivity according to the study is down and it's been going down every year since 2009 when they started blowing all this money in infrastructure and now total factor productivity in China is the same it was in 2000 so that's shocking at one level it's you're relevant because somebody the Chinese consumers and the China people are paying for that and then they're subsidizing all these companies and so you look at solar for example where in 2000 we had something like 50% of the solar industry in the world of PV panels now we have 5 and the Chinese have 55 they did that through an enormous amount of waste I mean enormous amount of waste but it got um a globally competitive solar industry we see it in we see it in high-speed rail we see it in the fact that III think Washington DC wants to buy Chinese rail cars for the Metro well those are massively subsidized so again I shouldn't look at it from an efficiency model because they're incredibly inefficient but when you put enough money into something you can get results but I do want to I think it's important to also think you know understand that the the level of technology going into the production the design of a chip is fundamentally different and on a tremendous sort of 10x scale in terms of complexity when you compare it a more traditional industry like solar or high-speed rail and so I think I think we have to really understand that and recognize that the success ratio is gonna be dramatically reduced I agree with it I that's why I said initially this was the hardest industry for them to do and it is going to be hard for them but I just I just caution us against sort of being too over confident that they'll never do it I think frankly one thing driving is just prestige as well and that it's hard so they want to try and you know anything China has this sense that they're the you know world's largest country they've got this manufacturing supply chain there they they need to have this industry and that's their view they just put up you know they put a probe on the back side of the mood that nobody's ever done before and I don't I don't think anybody thinks that China won't be successful in some way I think the question is the rate of change and the effect on the market and the rules that China follows when it does improve and that latter point is the crucial one but maybe I can start with Rob on my second question which is maybe 10 years ago there was still a debate about whether China had the indigenous ability to innovate I think that debate was over no one would say how the Chinese cannot innovate but when you go to China what you hear in private is a concern that the political narrowing will somehow damage this innovation capability so let me just I'll start with Rob and then we'll go to Aaron and down the row house Chinese politics going to shape their ability to innovate their ability to create high technology they have policies on innovation and technology but they have other policies that may create drag so Rob yeah just a little bit like if you have a giant tractor pulling your tractor pull pulling I get a one ton piece of cement ax the question is you have a more powerful tractor than the cement dragged and so far the tractor is more powerful than the drag I mean I would say I don't know I just I just think I just keep thinking on this that the fundamental issue here is not about whether they're gonna be able to do it or not the fundamental issue is about how they're doing it and that's what we have to confront so I and I I think the Chinese can can make progress I don't think that the current sort of limitations and what the government's doing I mean they try to by the way the other thing but they're very good at engineering innovation again when we think of innovation we tend to think of cutting-edge global science innovation that's one kind of innovation engineering based innovation there's another that's pretty critical I mean the Germans are super good at engineering based innovation they're better than we are for example and they're very successful economy Chinese are good at engineering so I don't think we should emit this dismiss that this is very science intensive pardon this is very science it but this is both I mean this is this is again I'm not I'm not think there's a lot of engineering and as there's a lot of science so the reality is is that Chinese politics affects almost everything I mean that that is the nature probably of any governments politics there's very few governments that have no hand in trying to promote certain areas I will disagree with Rob on the idea though being able to put a lot of money into this means that there's that we are dealing with something that basic economics isn't still going to be proven true economics is not Theory China is spending large amounts of money to try to promote these industries and the key question really is how fast can they do it but it is not sustainable to subsidize industries simply because you want to be a leader in them they're going to have to be able to survive on their own and whether that is you know a VCR versus online you know I'm sure the folks who made Betamax are wishing themselves they had the best technology but they didn't make it on a scale that anybody really wanted to buy that's the that's the challenges can the government stay far enough away from this - in semiconductors or any other sector to allow companies to innovate on a way that makes them competitive globally and not distort what's happening by simply allowing the flow of free money to be too heavy I think one thing that's it's important to consider is that when you think about innovation it's one thing to be able to innovate the technology it's another to be able to commercialize it and so if you look at a lot of the state back projects that China has whether it's their 863 or their mega projects they're actually able to do a lot of really innovative things but they're for strategic applications usually limited to a government application so for example inside China's fastest supercomputer our Chinese developed and manufactured micro processors and they've been able to power that supercomputer which which is you know running some of the world's most advanced software but those chips have failed to be able to commercialize anywhere in the market let alone within China because they're too expensive and they're specific to that one system that they've built to win that race and like you know another area for example China has very sophisticated sensors and imaging chips for their satellites but they haven't been able to make the make their ships they use for their bado gps for example to compete on the market with GPS and that's you know this cost efficiency market bearing all those things they've really gotten completely wrong on those systems but they never really intended them to for government applications and so I think you know where China is has the biggest challenge is figuring out how do they take that state plant actually they call it and Chinese the juga teacher or the sort of state mobilized effort like they do to try and pump out gold medals at all costs means that you're not entirely going to be successful in the commercial market it's not a given I think and so you know particularly sometimes when the US government looks at China and high-tech and for example in Semyon actors and they see these pockets of really innovative success they might assume well that's gonna translate over to you know commercial DRAM chips or the commercial competitive foundry and again it's one thing to innovate for strategic technology purposes it's another to commercialize it win market share sort of and predict what's the next technology shift happen in the market they need to be on top of so I think those are two very different things I think the other thing we have to think about it and Jim you talked a little bit about in the report one of the reasons the US has been able to stay ahead when we have Intel kept staying in is because innovation kept progressing at a fairly rapid rate and so we could be two generations ahead of the Chinese you can master that two generations ago chip and it sort of doesn't really matter it's sort of like saying hey I can sell you an iPhone to do you want it that doesn't appear to be that that appears to be changing that that that the process of the speed of which the sort of innovation frontiers is going is slowing down which means the Chinese have a little bit more ability to catch up and secondly it appears that a lot of the future demand and chips is going to be somewhat more commodity base if you think about 5g systems or IOT chips IOT chips aren't super complicated it's not to say that they're not is not to say that you don't have still innovation but I think it's you know that to me is why it's so important that we have to have a domestic innovation policy that allows and enables our companies to keep going at a super fast pace you do and have anything can go so you've all touched on this a couple times and we've been all four of us have been watching this industry for a while and so for me this is the third or fourth time we've seen the movie Chinese government announces will build chip industry and you know Jimmy's point about the mayor wanting thing I used to have a collection of pictures of mayor's standing in front of fab shaking their hands and then two years later the fab is shuttered and it never really made anything it's this time different I mean we've seen this movie before lots of money government policy focused at the local levels and it doesn't work out is this one different Jimmy why don't we start with I'd say yes the level of capital is 10x what it was in the early 2000s in the in the late early 90s when they had their first and second sort of attempt at the industry and then the attention at a political level is much higher in the past you had you know China's Politburo you have the general secretary general he was one of the Palpa members who kind of took on this industry as their pet project and pushed forward some of the imperatives here you've got very clearly seen him paying saying I want a ship industry standing in semiconductor fab saying I want you to boost production you need to do this faster quicker and partly that's because of the political environment globally as well and I think I think that's certainly having an impact on this but again I think many of the same factors that led to lack of progress and success before are still there and they haven't done those fundamental reforms to engage in privatization increased transparency in the market level of playing field increasing protection of intellectual property those are the things I need to do I think and that that makes it so competition with Chinese and multinational companies in China is on that level playing field today we still have those those issues that are vestiges of decades before that haven't changed Aaron did you want to pick up on that yeah I think I mean in some ways I don't think that we should ever assume that any policy is always going to be ineffective because it was because it has been in the past I think Jimmy makes an important point the global context in which this is happening now is very different in and of itself so China is not simply interested trying to develop a semiconductor antigenic because they want to be a global leader in semiconductors they want to be a leader in global semiconductors because they are seeing threats to what their access to that technology might be and they are seeking solutions that will ensure that not only do they maintain employment and kind of cutting-edge technology they can bring to it because cutting off of that access from some of their major trading partners would be disastrous for their economy so really that also then leads to the fact that whether the policies are successful independently can't be determined if we don't know what that global context is it are we in a world where the the us successfully puts in export controls that our trading partners agree with and so there is a stemming of the flow of those products into China where as a world where the USS unilaterally and there is no stemming of that flow those could all make a determination Rob did you wanna we should come back to that point because I think that one of the problems I see is this is not the u.s. of 20 years ago and so we may not be as competitive in some ways as we were and we can talk about that more but Rob maybe that's oh well I just agree with everything Jimmy said I'm gonna add one more component to it so a success if you're a follower and you're not a leader in innovation depends on a lot of things but one of the things that depends upon it is sort of your indigenous capabilities of your scientists and engineers and technical workforce so that they can't just be you know really down here they need to be here and that's been a lot better in China ten years ago they're there they're better than they were ten years ago and tenure they're gonna be better than where they are today so I don't think we could we could ignore that I disagree a little bit with Aaron on the export control thing but we can talk about that somewhere why don't we see if there any questions in the audience I have more just hold up your hand please identify yourself I think you should wait for a microphone because we have a huge online audience watching this so why don't we start up front and just go down and around is that okay Thanks so Steve winters independent consultant to take a specific case which touches on everything you said how about what are your comments about this Chinese plan for the so-called greater Bay Area where they're going to unify you know this whole area around Hong Kong into and and draw on the features of each one for instance you mentioned the commercialization so their idea is well Hong Kong is going to be so strong and finances so they're going to be the financial component of this and then Shenzhen is massive and manufacturing and then the other areas are doing things it's seen and the whole thing is on a tremendous scale and and just to follow on that the idea this I the name Bay Area I mean I copped the name but could you comment also on on how their their father they're trying to catch up with foreign targets it's one way they orient themselves for instance the idea that they're trying to displace NVIDIA from its position in the AI and that would involve the chips do okay Aaron do you wanna start with that on the the Bay Area policy is relatively new so we haven't looked at it in depth so I will say I will just go back to what I had started with and that is having a plan doesn't guarantee its success certainly the Chinese have correctly identified where this the strengths are in each of those areas whether that actually can come together in the type of cohesive effective region is to be determined Oh Jimmy I just had you know the question on on seminar just for AI you know particularly in the area of graphics processors which is the technology you mentioned that's actually one of the areas where the gap is the farthest and you know in the you know types of GPUs that are being developed today you're looking at billions of transistors at seven five seven nanometer for example right now in the most advanced ones and that takes five six thousand engineers literally right now to tape out one of those chips that cost around five hundred million to seven hundred million dollars and and that's actually where the gap is the longest visa vie Chinese competitors actually the one company in China that does this is about seven generations behind the world leaders in this space so you know I think for example there was a press article last year that said of China has got a plan to replace X company and and GPUs and you know again send me upon Aaron if you actually think about what it takes to do that haven't yet seen the resources being put at doing so and again you know we had one one of our members actually say you know they're trying to take five percent market share away from their US competitor and they're throwing billions of dollars every year to try and do that and then maybe if they're lucky they get one and a half percentage points away from that US competitor and so to entirely replace a foreign company in the China market and the chip space is gonna be very hard to do particularly when you get to the very high value add segments like logic some of the very boutique analog chips some of the new memories that are coming out 3d stacking very very very difficult things to do I will say that one place where I think we have a question there Daniel one place where I think the Chinese do have an advantage is they don't have the angst about spending on public goods like infrastructure and research that we have here and so that could be a place where not so much that China speeds up but that we slow down but please identify yourself and ask your question yeah thanks very much Hal Hudson from the economist two very short questions fabs are clearly important in this discussion do you see any evidence that TSMC treats Chinese fabless I see designers differently than ones from other parts world and secondly what you see is the benefits of the potential for the reduction of cost in ICS coming out of China the visa in the same kind of way as we see in solar panels that's a good one anyone want to go first I guess you know I can't comment specifically on perspective from TSMC but you know from the if you looking at the fabless industry worldwide north american fabless companies are about 60 70 % of the industry there are a lot of fabulous companies in China supposedly the Chinese statistics say it's in upwards of 2000 but you have a lot of tiny tiny tiny firms but there are fast-growing revenue segments of the market and much of what those Chinese fabless companies are doing are things like sensors for your microwave or stuff that's gonna measure the pressure in your tire and so on and you've got again advanced companies high silicon but a lot of the Chinese fabless companies are in that IOT space and and that's an important revenue driver for the global foundry industry and in many cases again like with a lot of our customers the fastest-growing segment so so I think again be like with any really economic industry across the globe Chinese companies are gonna play a pretty integral part to whichever segment it is I haven't seen any evidence of favoritism at TSMC but there is I think a concern that given their location and the growing Chinese influence that could change when I was in graduate school they taught us you can tell where I went they taught us that if people want to subsidize a product you should accept that that basically they're its people giving you money very Chicago school and I was always a little uncomfortable with that argument it's certainly not one that's popular in Washington so lower price at what cost and that's I think what you see with a lot of the debates over this and I think to add to that to your second question which is you know take electric vehicle batteries or solar panel as well certainly the price came down you saw benefits to some consumers because of that but there is also an argument that it crowded out a lot of innovative and interesting new technologies so for example in the Eevee space you know I know CSIS has done a lot of work here to look at see ATL and some of their battery companies in China where they're basically throwing their weight behind the lowest margin cheapest cost-effective technology strategy and crowding out all other types of technology that actually does have promise may be more efficient maybe a little more expensive but it actually holds a lot of innovation promise I don't know Rob you've done some work in this to me if you look at batteries for example we're never going to decarbonize the world I think hard to be carbonized you can only get so much improvement from scaling and I think we're gonna need alternative chemistry's not working and and if you look at solar it's the same thing ITF wrote a report a number of years ago looking at the patenting it's really the yeah the patent rate in solar and wind companies around the world and us and Danish and German solar and wind companies were patenting on the order 20 times more than Chinese companies so China basically stole the market with subsidies and they put out a business an enormous a number of really innovative solar panel companies and as a result is Jimmy said you got a short-term benefit from cheaper solar panels the solar panels are not good enough to decarbonize the world right now you cannot decarbonize given the existing technology you have to get another generation or two of innovation there and that's what I worry about then that's a conversation excuse me that we don't really have very much in this space we tend to think about it in a bilateral way out what's China doing to us what are we doing and I think that's the too narrow way to look at it we have to look at it as what is happening to the global innovation process in all these industries and I think Chinese innovation mercantilist policies and have had significant harm to that innovation dynamic at the global scale so I think one of the things we'd probably want to talk about is that subsidies mean lower prices but they come perhaps with unacceptable externalities that would be the term and certainly for the solar panel one I think something that hasn't come up is a lot of that had to do with espionage German officials told me that their their alternate energy industry was hollowed out by Chinese espionage so it's the combination of subsidies and espionage Erin do want to jump in on this one I will leave this one to you okay we got one more there and then we go we'll go we'll get the whole room we got I just I've just add if we had good look better lithium batteries it wouldn't say on my thing dead battery welcome to CSIS go ahead please introduce thank you for being here today Isabel Hoagland with inside US trade White House economic adviser Larry Kudlow this morning set documents part of the us-china deal include quote a de-emphasis on Beijing's made in China 20 2025 program and the significant reduction of China's subsidies to target those industries is part of those documents he said do you have any idea what this language looks like and if not what commitments should be included specifically as it relates to semiconductors do you think this will be an effective way to address the Chinese government's program and do you want to do that well sir I won't I'll let Jimmy and others talk to about this end of it we have already seen China's government back away from touting made in China in 2025 as we sephorus Lee in recent months because of the global attention that it got and the concerns about how it was being perceived that may also be a reflection of the fact that it was one of those policies that wasn't fully bought into by all Chinese government agencies I think the key is in that and in any other sector and the reason why the details are so important between not just us-china agreements but any agreement of this nature is that the agreement needs to not be so specific to an individual program there is the wiggle room to say well I've stopped subsidizing this under made in China 2025 but the subsidies then resumed in other areas there is no way to do that with a one-time agreement that that is the kind of commitment that you need that will require not just ongoing people calling them ongoing meetings rather than dialogue these days but also regular regular engagement with industry about what they are seeing and good intel on what's happening in the market so yeah we are pleased that all of those are things that are being discussed by the two governments the reality that made in China 2025 as being de-emphasized is I would say generally good but we need to be aware of what could take its place and what needs to be done to address its the distortions from those programs not just the named programs so I would argue if we don't have a strong and enforceable subsidy regime in that agreement that it's not really worth all that much it needs that and it needs IP a tech transfer an IP theft those are the two main things and my market access to but if you think of I think the way we should think about this is how we the OECD has an export subsidy regime which the u.s. is a part of and so our Exim Bank subsidies or investments there's a limit on how much you can do and we abide by it the Canadians more or less abide by it the Europeans bide by the Chinese do not the last time I looked at this the Chinese were 10 times over the limit so I think we should say that China get in and always CD subsidy review most in one way shape or form and we expect you to we're not going to say you can't ever subsidize they're always going to subsidize but it really needs to come down in my view at least 80 percent maybe 90 percent and it needs to be actually I thought a light Heiser's point about who sort of quarterly or monthly updates and then quarterly and semiannual that's the level of oversight we have to engage in and if we're not seeing pretty rapid progress then bring that down and then stay down then we have to be willing to go back and take a pretty strong action against them it would be it would be my view I think the fact that they're making progress on those really key structural issues is a positive sign you know whether it's subsidies intellectual property theft forced tech transfer those are the issues that our industry things are really critical when it comes to the trade relationship with China and you know a focus on deficit or purchases really is just a big distraction from from those issues and you know I think there's tangible ways that the negotiators on both side could really make some progress first when it comes to the issue of subsidies transparency number one is is really a good stepping stone to trying to come up with something more rigorous in that for example I mentioned China has all of these massive semiconductor funds they haven't notified any of them to the WTO which is one of their one of their basic obligations don't even omit that they're a government subsidy and then when it comes to intellectual property protection you know there's been some positive steps in China so far but there certainly could be a lot more when it comes to providing you know a level playing field inside the courts increasing criminal enforcement and you know I think trying to get the 2015 cyber greement back to a good place would also be a significant improvement not just for us but these are issues at any high-tech company for the United States faces I think you can see there's a degree of skepticism regarding any agreement particularly if there's no compliance or penalty Michel mechanisms involved but why don't we go on this side and then start here please hold your hand up and identify yourself hi I'm Alex hammer from the US International Trade Commission first of all thanks very much for all your great insight today and you all have been talking very much about the competitive elements between the US and China the semiconductor industry but what about the mutual dependence you think about US manufacturing offshoring in China for a lot of the semiconductor for the US headquartered semiconductor firms that are doing a lot of manufacturing there you think about all the US exports going into semiconductor manufacturing equipment if you could just comment on that dependency element I'd sure appreciate it thank you I can take that okay sure I mean as I mentioned in my opening remarks the semyonova industry is arguably the most globally dispersed and integrated sector and so there's no one country or company that really can do all this on their own and so whether it's upstream downstream you've got countries relying on each other all across the value chain actually when it comes to China there aren't actually a significant amount of US front-end semiconductor factories in China there's there's one or two but that's roughly less than ten percent of our global manufacturing footprint is in China you actually see a much higher again 50 percent of manufacturing for US companies is still in the US and then really it on the list of big big countries where we do that type of operation is in Japan Taiwan Singapore Germany Israel countries where you have high educated workforce intellectual property protection you're putting in a ten billion dollar asset you want to make sure that your prop IP is going to get protected and so because of that I think historically those investment levels by US companies in China have been low they're changing a little bit over time but still the vast majority of those very expensive fabs are actually not in China today at least from a US company perspective but the process of making a chip it's extremely complex you have at the beginning you know you have your materials and silicon or the compound materials are coming from Jack and Taiwanese companies and German providers Semyon doctor tools are coming from Japan the United States the Netherlands all around the world different types of countries and then looking in the design software again you've got all sorts of different players so if you look across almost every segment of the industry there's never really one country that dominates it all it's easily dispersed across and that level of independence is the same for whether you're a Japanese firm or a Chinese firm well I'm gonna tease on that a little bit and Aaron you mentioned the aircraft industry and so having watched it for a long time let me ask you about a potential scenario which is if you look I forgot what it was called the Y f10 or something that the Chinese commercial aircraft of 20 years ago we're pretty dreadful and I always used to feel terror if I had to fly on them but during that period China used its market position to get companies Boeing Airbus Embraer to agree to co-production in China and that co-production legitimate and a normal tactic for the aviation industry in many countries taught the Chinese skills in how to make airplane so when you look at their latest commercial entry still not maybe up to global standards but much much better and on a better path and the question that some of us would ask on the asymmetry point is if you if you are required to operate in China and you stopped operating in China does that affect your your market share and if the Chinese are going to squeeze people out it may not be as much of a problem for companies to have to leave and the second point I think Aaron race this is one of the things we all worry about is China may very well say to recipients of aid or domestic airlines you have to buy the stick aircraft we've seen that in other examples as well so I think that affects the the dependence question is if China's not as big a market or if the Chinese appear to be behaving unfairly but I don't know Aaron if you want to touch on that one yeah certainly requirements to either localize your production or to be in a joint venture requirement these are all areas that have broader implications simply beyond just what innovation is happening in it these also are among areas that we know the two governments have been talking about yeah I think the thing to keep in mind in terms of global production supply chains and those kinds of areas is you know even if China were to move to allowing 100% foreign ownership in every sector not every company would take advantage of them some of them have JV requirements that they feel are useful for their companies some of them like to localize in those areas some of are in industries where they would preferred not to have to be the face of the company in China so how it's a what the requirements are need to go out but that then needs to enable foreign companies to choose the model that works for them and that's probably going to differ based on both by industry as well as by individual company so I would argue this is a perfect example of how what the Chinese are going to do will dramatically dramatic institutions will harm global innovation in the in the aviation industry so if you think about what both Airbus and Boeing did and the sort of last big iteration they made huge bets Boeing has spent billions and billions of dollars to perfect carbon-fiber aircraft frames and all these other innovations Airbus didn't want the other way Airbus lost they bet they bet the wrong way but that's what innovation is fine we're not gonna if we're in a world where my son or daughter are flying a 787 in 30 years I'm gonna be really troubled because I want continuing aviation innovation and one of the ways you do that there's a reason why we only have two aviation companies in the world by and large for making bigger planes we got to remember air and the Canadian yeah Bombardier so we got you know but basically we have to and there's a reason you have to because the fixed costs and the Rd cost the upfront costs are so great you can't afford to have three players in the global marketplace that would be unnatural and totally wasteful companies won't be able to make enough money to reinvest all the money they need to do to the next generation Chinese are gonna have a third player now that third player might just only take over ninety percent of the Chinese market and then a whole bunch of the Kazakhstan market and all the other belt and road markets because they're gonna pressure and subsidize them but that is going to cut into Airbus and Boeing sales and that's going to have a negative effect on their ability to get that next plane out there and I'm agree with Aaron company should be able to do you know with leaving aside defense issues pretty much whatever they want to do in China but they shouldn't be forced to do it and they shouldn't be up against competitors who are massively subsidized or had the technology so that's the fundamental issue it's not about China innovating it's not about China product progressing it's about not the ends but it's about the means more questions we got hold up your hand please surely you're not stunned into silence we've got two on the side over there things are good here space okay could you repeat the question sorry can hear me now yes all right so I'm Robert Rasmussen from the Department of Commerce and my question is about what kind of developments are you seeing towards semiconductor independence with military and space based applications independence by China yes okay well so one of the goals we had for many years at this point probably a couple decades was to hamper the Chinese ability to build those kind of specialized chips in order to preserve a military advantage um I don't think that program pardon me worked out as we hoped largely because the quality you need is either specialized and the Chinese can make it as you heard from Jimmy or the two or three generations back is sufficient for military purposes so if you look at our own aircraft they're using technology that might now be almost twenty years old right so I don't think that the this is a this is a specialized market where I think the Chinese will probably be able to do pretty well if they want you know Jim going back I think to the you know China question about what do we do in terms of the you know the USS my last question I guess I'm jumping the gun a little bit but I think it's we have to you know the UN the US industry has actually been in a position where we had a significant competitor we had a lot of state support and that was back in in Japan the 1980s and so a lot is different today which I don't think we we can compare that right the Japan market was fully closed China market today is fully open Japanese companies are actually ahead of us companies we're still ahead today so there's a lot of differences but you know I think there is one similar in and some lessons learned in that you know that the key to us regaining the lead was really when the Congress and the administration decided to set up something called SEMATECH with the US industry investing I think in 1980s dollars hundreds of millions a year in an effort to try and revitalize particularly on the semiconductor tool side areas where we had gaps in tech and that really helps catch up and frankly look in different directions that Japan wasn't focused on because their companies were all building D Rams and we decided to do things completely differently and build entire new markets and so I think coming back to you know where I ended before in my opening remarks you know there's things that we can do to address issues that have raised by China first intellectual property protection has to be paramount and then second through the trade deal trying to bring more of a level playing field particularly when it comes to things like subsidies disclosure of IP but really you know I think we need to think back to things like SEMATECH what can we do today to invest in the future you know DARPA has a new program I think you meant its branch in Europe or the electronics resurgence initiative investing 1.5 billion over roughly 1.3 billion over five years that's a really good start and I think there's a lot more that we can do there particularly when it comes to basic R&D that was going to be my last question so let's come back to that one because I think we had one more over there is that right please and please identify yourself hi emily fang NPR one question for Aaron I'm wondering what countries on the west coast u.s. semiconductor companies are doing to prepare for any sort of addition to export controls that might be announced later this year and then maybe one for Jimmy you've talked about how China has made significant strides and some of the lower end semiconductor products things like IOT sensors MEMS given the global trend towards connected devices smart devices things like that is that their low end but is that an important piece of the semiconductor industry Thanks so Jimmy I'll let you take the specifics on what the semiconductor industry is doing generally what industry is doing is frankly wait for the Department of Commerce to get a little more specific on what's going to be covered by these new export controls the potential for expansion to cover technologies that go well beyond what has traditionally been covered I think is large both in terms of the first that we're gonna see emerging technologies but particularly in terms of how they define what foundational technologies are they they are in itself by definition things that many companies are already using and probably exporting fairly freely so right now there's really not a whole lot companies can do without knowing what the specific regulations are going to be there's a lot of education that's going on I think within companies both in terms of investigating internally what their own productions are what's the nature of the products that they make and their business relationships in China and in other markets to try to be able to respond once commerce comes out with a specific proposal so just to add upon that I think you know so the SI we made a submission to the most recent request for information from the Department of Commerce on their emerging technology controls and you know I think at a high level the most critical factor that we want the US government to think about is you know export control is is something that for four decades has been an essential tool for national security and it's really critical that they don't use export control as a tool to address a trade problem and we want to be able to isolate those two issues on separate tracks and we have the trade dialogue to take care of our trade issues and when it comes to national security issues that's really where the lane of export control is and within that lane they need to think very hard about how do they narrow and specify what they're doing to have the most minimal amount of blowback on on us industry because while we have half of the market today the other half is non-us companies and going back to interdependence there's really no segment in the industry that's dominated entirely by US companies and so if the u.s. acts unilaterally in this space then they're really just going to end up hurting innovation here in the US and trying to still going to get the technology that they're concerned about so you know I think what we did is laid down some core principles that you know while we respect the concerns of the US government and they need to be taken very seriously they have to first and foremost think about that the competitive nature of our industry us being successful should itself be a national security concern let's not do something that's going to inadvertently harm that for the sake of you know trying to slow something down in one space there's an innate tension in the regulation and this appeared in the negotiations on the firma legislation as well which is the primary target the intended target and perhaps the only target is China and China's ability to acquire technologies of national security significance our current export control system will not be as effective in stopping that outflow right and there's a reluctance I think to take that step back and say what we have now is the same system we had in the early 1990s oddly enough a 20th century system doesn't work that well what a shock but there's a reluctance to do this kind of rethink that's legitimate companies are worried that it will be there are some parts of the government that would prefer a very broad catch on China and that would have harm to industries around the world at the same time the relationship is such that I think you'll see a desire for increased controls and so what I'm hearing I don't know if you guys are hearing this too is is a shutdown didn't help but it will be three to six months before we see the response and then it will probably be another three to six months before we can see anything looks like a regulation and I my bet is that first generation regulation will not address the problem we want to address so this will be something that will probably play out over the rest of the administration but again we have to think about you know the unintended consequence you know going back a year ago we all know what happened with ZTE not out of coincidence China announced several hundred million dollar programs to accelerate the localization of a lot of the 5g components and so you know we're going to just drive them to yeah be better more independent of us because of that I think that's something we need to think about because at the end of the day do we want American ships over there or do we want Chinese ones and do we want to maintain that scenario do you want to drive them away from it and that's where I will stop beating this one but I just quickly I just I just wanted I'm trying to put my marker down with Jimmy on that I mean will you completely agree with that I think one of the biggest and most important things we can do is everything possible for the u.s. to take global market share away from the Chinese and if that means selling to the Chinese then by definition we're getting market share they're not that's the thing that was going to drive our innovation leadership the most and so I I completely understand there may be some components in there that have to be controlled because they're pretty clear defense issues but there's a real risk you can go too far and cut off our ability to sell and again coming back to the multilateral part of it whatever the US government does again hopefully narrow very limited to what they're trying to achieve and it's in the narrow not trade space has to be done with allies and I think to the broader point you know if you look at may 2 20 25 targeting automobiles shipbuilding aerospace semiconductors these are issues that our allies face on a daily basis for example in Japan South Korea and I think the US government has a tremendous amount of room to work with those allies and you know looking back on areas where we've actually made progress with China in terms of rolling back problematic regulations every time it's been in concert with Europeans Japanese in other countries trying to push back because when China realizes they've kind of gone over the margin and they've gotten not only the United States but many other countries to criticize them they actually tend to retreat and so again whether it's trade or national security-related has to be in concert with our allies so one thing just as a general point and you're seeing this now in the discussion of whay and allied reaction to it a lot of the media reporting is wrong there is a good consensus between the US and its key allies the Germans might be the outlier here on where the risk is there's less consensus on what needs to be done but I think that in private and some of our close allies do not wish to openly confront China they're happy to hide behind the US but in private they are willing to look for cooperative solutions and particularly in this space and what you call the emerging technologies there's more consensus and maybe apparent to the naked eye one of the dilemmas we have those we've built a global supply chain since the export controls were put in place and it will be very hard to disentangle that and it's probably not in our interest right so how you put export controls on a global system it will be difficult where people are leading is and you see this in many areas I'll use an example of Chinese students there's a general acceptance that the Chinese students Chinese workforce some of them will take technology back and that creates the leakage creates risk but people and this echoes I think a point Jimmy made people say my goal is to mitigate that risk my goal is to limit the damage and I believe I can come up with systems whether it's in telecom or education or semiconductors that will let it let me mitigate the risk of technology leakage and the question I always ask is would you rather have them here working for us or there working for them right and in 80% of the cases if it's an 8020 trade which is a educated guess we do better by remaining open but it's going to be very hard to map these old-school export controls on to a very different global economy boy that was a long subject you could really hit the wrong button any more questions go we have two in the front and then we'll do a closing remarks on what the US can do we got one up here and one up here and please identify yourself hi Scott Thompson from Samsung on the state subsidization question on the Chinese front I take Erin's point that it's unsustainable but I assume that implies unsustainable at its current rate in the semiconductor field so if and when China reaches a certain level of competitiveness on DRAM or anything else how much can we project ahead that there will be a curtailment in that subsidization rate or would it continue at current rates to try to undercut the undercut the market and pricing internationally keeping in mind that otherwise I might you know sink under its own weight so how much variance is there in the path for Chinese state level subsidization in the semiconductor field as we model ahead to the future so you know I think despite the you know the press reports that you know made in China 2025 is changing a name and so on it's still full speed ahead in terms of domestic semiconductor capacity investment within China and I think the only thing that's going to constrain investment particularly from a government space is going to be a macro slowdown where you know they need to be forced to make decisions over where are they going to spend their money and they're gonna probably spend money when if it's constrained and things like pensions and education to keep people happy and actually also the interesting thing about semiconductors is while we're very important technology our workforce direct footprint particularly in fabs is actually quite small and so you don't actually create immediate jobs inside the fab but you enable a lot more through the to the technology and so China can still get that enable meant by using chips from countries around the world and that brings actually more jobs and growth to the economy then direct contribution from semiconductor employment so so I think the short of it is though that particularly in things like memory production like you mentioned this is such a high priority for the state I don't I don't see that the state support going away anytime soon and in fact you know the Exim Bank China Development Bank president are visiting these factories every day saying you've got a green light from us whatever you need you're going to get and the state saying competition success we measure that in twenty year time frame so you know we'll see that's a long time but you know I think what will happen is some of these projects where it's the older technology the funding for those is gonna dry up whereas projects that have more promise where they start to make inroads into the market government will keep those investments alive and you know one final point is it was in China last month and meeting with one of the big state-owned chip makers and they said well you know our fab here really the government doesn't look like doesn't look at it as a commercial entity it's basic infrastructure and basic infrastructure doesn't necessarily need to be profitable because it provides a greater good for the industry and so they have them when it comes to you know the government involvement completely different perspective so we can't even raise the gas tax five cents in the u.s. because there'd be a political uproar supposedly and you get voted out of office Chinese don't face any of that zero you can do whatever they want they also have to remember in 10 to 12 years the Chinese economy will be twice the size it is today which means twice the amount of government money they could cut this rate in half and it's still have the same amount of money I don't think they face any constraints other than some sort of massive credit explosion because they're over leveraged and but just in as long as things kind of proceed quasi normally I just don't think there's any constraints I think you just keep doing whatever they want to do Erin you touched on this a little bit but the question about and Jimmy touched on it to Japan as a model for what could happen to China so in thinking about this investment question maybe you could also discuss that I mean when I look at their debt yeah there's so many things that are very different in terms of how China's economy functions in Japan I've always been reluctant to use that as the model I mean certainly the risk of of over subsidization and kind of allowing your companies to to be dominant in your domestic market and not consider what that looks like in terms of global competition I'd say is short-sighted and I think though the China kind of likes to study what the previous models have been so I think those that are setting policy are aware of what they think the risks are that created those problems and they are actively seeking to avoid them great we had one more question in the front I think and please identify yourself Thanks I'm Jeff ferry with the Coalition for prosperous America although I think my question reflects an earlier time in 1999 I worked for Nortel which at the time had 95,000 employees five years later it went bankrupt and today huawei dominates that market as you know and when I look at a huawei networking system I find it really hard to find anything they have developed internally in those systems so I I guess my question is I find some of you on the panel with the exception perhaps Robert to be complacent about the chip industry because when I look at the chip industry you need three things you need to know the direction of innovation which comes from knowing your customers all of the chip industry's major customers outside of defense or today building in China so they're there secondly you need technologists and this is where I disagree with you we are training them in American universities right now in most of the Graduate departments and most engineering departments half the students are Chinese and a significant number are going home as you said and thirdly in the capital which they've already got and then if I you know I would just look at the chip industry which has got gross margins of 60 to 80 percent they're soft like the guys at Nortel compared to the steel industry those are tough guys working on 20% gross margins they've all been decimated by the Chinese so you know looking at all that if I was an investor I'd say in ten years more than half of the chip industry is going to be in China and Silicon Valley is going to be full of unemployed people and you can be able to my house in Palo Alto for less than you can buy one in Baltimore well that would be great let's use that as a lead-in to the what I hope would be the concluding round of discussions which is what should the u.s. do back I am gonna put a footnote in here which is there was a book that came out some of you've heard me say this before in 1968 entitled will the Soviet Union survive until 1984 and at the time it came out all of the responsible and most ridiculed it and said it was silly how could this person possibly write this he was off by five years and his opening line was people make an assumption that things now are better than they were ten years ago and therefore ten years from now they will be better than they are now and I'm not comfortable with that assumption I've never heard Jimmy called complacent though so maybe we'll let him yeah okay I apologize to get a plant you mind if I go first and then I won't yes I don't mind no go ahead anything then forget it it's some it's some way it's I I think it's not all that important whether you're right or other the more you know people are more optimistic are right if we're a betting country if you're a company and you fade you assume it's gonna happen and so if we're a country and we assume it's gonna happen that tells us that we should wake up and we should do things and so whether it's gonna happen whether they're gonna fail I don't care I think there's a risk of it the risk is not de minimis and therefore we better wake up and do some things and what I would say we need to do and I'll leave the side of the China Park is we've written extensively about that I just testified and send it on that yesterday it's a million things we can do in China Jimmy or Aaron can talk about it but domestically we tend to ignore that we tend to have this view if we just go after China everything's hunky-dory the opposite is also not true - if we don't go after China everything's not hunky-dory so what could we do number one what we forget about in the 80s it's and I was here in the 80s but you forget about is there was a massive bipartisan push to put in place a suite of Advanced Technology and competitiveness policies we created the research and development tax credit under Reagan as late as when Clinton it was the most generous R&D credit in the world it's now 27th at least generous so we ought to be doubling the R&D credit instead of what Congress did which weakened it in the last tax bill they did some other good things in the tax bill but they weakened the R&D credit we should double the R&D credit from 14 to 28 percent secondly Jimmy talked about SEMATECH we there's also what was the focus Center and now it's star star net and just our net that program should be twice as big this is a DARPA program with industry we should be funding if you look if you look for example at PhD fellowships that NSF gives in this space they're dramatically lower than what they were 20 years ago we need to be funding PhD fellowships in this area you look at federal funding of R&D if we just had a little report on this if we had the same share of federal R&D to GDP ratio which is the right measure and we wanted to match that from the mid 1990s mid 1980s 87 let's say you would have to double federal R&D today we're talking about a hundred and twenty billion dollar shortfall and in physics and physical sciences where semiconductors is based less so in biology that shortfall is even bigger so there's a boatload of things we need to do and just sort of assuming that we have great companies we do have great companies but this is about an innovation ecosystem that companies rely on to be able to build on their own capacity so I didn't we just have to wake up and say it's time for us to do that now a little optimistic because we're seeing a little bit of that now particularly in the Senate on a bipartisan way were you seeing Republicans and Democrats beginning more to talk about this but I think if we don't do that we're going to regret it in five or ten years well thanks for coming a literal mic drop please don't drop the mic it'll break I agree with Rob that I think that the the combination of things that we have to do is to continue to go after policies we they in China or any other market in the world where they clearly are distorting or creating conditions in which is there is unfair competition but at the same time we've got to be looking domestically at what we can be doing I am I am a will wrap myself in the flag and say that I think that American companies can out innovate but they can't do that solely as Rob pointed out in an environment where we're relying on the company is to be able to do that looking at workforce retraining having a workforce that is genuinely nimble that can be employed at whatever the new emerging industries in the United States are going to be we seem hat we sometimes or frequently I guess I would even say think that trade policy is going to solve the problems that we have in our domestic economy without recognizing that our economy is dynamic and large enough that we can't assume that it is always someone else's problem that is causing us to not be as growing as fast or changing in ways that we want it has to be the combination so I would add to that you know to quote you know one of the founders of Intel Andy Grove you know only the paranoid survive and so you know absolutely you know I u.s. chip companies are not complacent when it comes to China and you know at the SI a this is one of the topics is discussed the most intensively is how do we maintain our competitive advantage how do we have a fair market and I think when it comes to China you know again it's focusing on the issues that are gonna be of concern whether its subsidies whether its intellectual property protection and ensuring that we don't have a broad brush approach slapping tariffs and everything and then assuming that's gonna solve our problem it's what's the most acute issue that's impacting the industry protection of IP and ensuring that we have a level playing field and then we also have to ensure that whatever we do when it comes to China we do so in concert with our allies I think we're really missing a massive opportunity to go even further if you think about it you know we've been able to in these talks of China if the administration officials are saying so achieve more than we have before just imagine if we had seven or eight countries behind us in concert we'd be able to push even further and in terms of you know investing in our future I think that's really at the end of the day we can't you we can't win without being able to invest in our future and we can't do either or as Rob's that we have to do both and we can easily triple quadruple funding that we have and semiconductors in terms of federal government research it's actually hard to measure the number but roughly a billion annually and federal government dollars is going into semiconductor specific programs like DARPA zri program like the star net jump program out of National Science Foundation there's you know for example the jump program they get applications for from universities around the United States for technology research and they have to leave on the table 50 70 projects because they just don't have the funding but these are good projects that they could fund if they had the money and you know the other you know component is really thinking about their workforce and that it you know today half of our students graduate students in engineering and physical sciences are foreign-born within that Chinese Indian students others make up a significant portion of that so we need to be doing more as a country to encourage students to have an interest in stem degrees because right now the challenge a lot of our companies have is fresh graduate coming out of MIT wants to work for you know innovative startup company selling you know cool ecommerce tools not building chips because it's not seen as sort of a sexy new field that that that's attracting students true for space and and that's a serious problem because for example talking to one of our member companies and they have a chip that's in hot demand in 5g but the engineering knowledge on that doesn't exist anymore and once these engineers retire no one's left to to design these chips for the future and they go to the universities and there aren't even an Americans studying the technology they need for communications millimeter wave chips and so on so you know we have to be able to ensure we've got the people to keep the lights on and the companies and then we have to ensure that we bring back the level of investment we did in terms of federal government research to ensure that we're really elongate in the lead that we have today because again semiconductors is not like these other areas you know that have seen unfortunate disaster like telecom Hardware in the US not a single company's left doing a front-end base stations at the edge it's all European Chinese and so we want to avoid that situation we have the I guess benefit of seeing now lessons learned what not to do and I think you see a lot more focus on IP protection in particular because we have the experience we can look back at other sectors and see what happened so I think we came out with some common themes here I mean one of them is that you guys were a little more optimistic that the Chinese will eventually get where they're going I'm probably a little more skeptical although I don't underestimate them at all and and I did an ideal world we would be partners we talked a little bit about the risk of Chinese investment to the global semiconductor and innovation infrastructure if it's done the right way it would be a benefit but if it's done on a very mercantilist way there could be real harm and we came this is probably a bad sign we came more or less to a consensus on what the US ought to be doing and I think for me the fundamental change from 20 years ago is that if you have a policy where the goal is to shrink government spending on public goods like Rd like infrastructure it will be hard to keep up with the Chinese or stay in front of them so on education I'll just note that when I teach at the University I always ask the undergraduates if I offered you a full ride in stem would you do it it's almost a hundred percent response positive right you want more engineers you want more scientists pay them but that's where we have trouble as a country and I think all of us have said that the good news is that's fixable this was a great panel please join me in thanking them [Applause] [Music]

Channel: Center for Strategic & International Studies

Views: 74,597

Keywords: Tags, go, here!

Id: ZHN2l-7dkoM

Length: 96min 21sec (5781 seconds)

Published: Thu Feb 28 2019

Reddit Comments

[u/barryhakker]

The discussion is very interesting, thanks for sharing. I also have to agree I rarely have seen such an infestation of wumao cancer as in that comment section.